Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 10 - Imputation rules - transitional and other amendments
Outline of chapter
10.1 Schedules 16 to 18 to the New Business Tax System (Consolidation and Other Measures) Bill (No. 1) 2002 contain amendments relating to the new simplified imputation system.
10.2 The amendments in Schedule 18 will amend the IT(TP) Act 1997 to provide transitional rules relating to:
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- franking periods for early and late balancing companies;
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- the conversion of franking accounts on a tax paid basis for early balancing companies; and
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- the determination of FDT liability for late balancing companies.
10.3 The amendments in Schedule 16 will amend the ITAA 1936 to:
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- remove the inter-corporate dividend rebate under sections 46 and 46A for franked dividends paid after 30 June 2002; and
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- remove the inter-corporate dividend rebate under sections 46 and 46A for unfranked dividends paid within wholly-owned company groups generally after 30 June 2003.
10.4 The amendments in Schedule 17 will amend the ITAA 1936 to:
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- broaden the exceptions to the benchmark rule, which requires that all dividends paid by a company in a certain period (a franking period) be franked to the same extent; and
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- replicate provisions in former Part IIIAA of the ITAA 1936 relating to distributions on non-share equity interests.
10.5 The New Business Tax System (Franking Deficit Tax) Amendment Bill 2002 will make consequential amendments to the New Business Tax System (Franking Deficit Tax) Act 2002 . These amendments are required because of the proposed amendments to the IT(TP) Act 1997 concerning the determination of FDT liability for late balancing companies.
Context of reform
10.6 The amendments relating to franking periods, the conversion of franking accounts for early balancing companies, and the determination of FDT liability for late balancing companies are transitional rules to complement the general rules for the new simplified imputation system, which came into effect on 1 July 2002.
10.7 The rebate under sections 46 and 46A will be removed for franked dividends paid after 30 June 2002. The inter-corporate dividend rebate has been replaced by the general imputation tax offset under Division 207 of the ITAA 1997.
10.8 The removal of the rebate under sections 46 and 46A for unfranked dividends paid within wholly-owned company groups after 30 June 2003 is part of the removal of the grouping provisions. This is a consequence of the introduction of the consolidation regime.
10.9 The exemptions from the benchmark rule will be broadened to recognise further circumstances in which streaming is not possible or unlikely. This will give greater flexibility in franking dividends to companies that will fall within the broader exemptions.
10.10 As part of the simplified imputation system it is intended that the imputation provisions in former Part IIIAA of the ITAA 1936 that are still relevant be transferred to the ITAA 1997. The amendments relating to distributions on non-share equity interests continue that process by replicating provisions in former Part IIIAA of the ITAA 1936.
Summary of new law
10.11 A period during which all dividends paid by a company must be franked to the same extent under the benchmark rule is called a franking period. Where a franking period of an early or late balancing company would otherwise straddle 1 July 2002, it will be taken to start on 1 July 2002.
Conversion of franking accounts for early balancing companies
10.12 The franking account balance of early balancing companies will be converted on a tax paid basis at the end of 30 June 2002. The IT(TP) Act 1997 already provides for the conversion of franking account balances of normal and late balancing companies.
FDT liability for late balancing companies
10.13 An FDT liability will not be imposed on a late balancing company that has a franking account deficit at the end of its 2001-2002 income year. Any deficit will be carried forward at the start of the companys 2002-2003 income year. This concession will ensure that late balancing companies are not overly disadvantaged with the alignment of franking periods with income years.
10.14 It is possible, notwithstanding the deferral of any FDT liability arising at the end of the 2001-2002 income year, that some late balancing companies might still be disadvantaged by the imposition of FDT at the end of the income year. Such companies will be able to elect to have their FDT liability, if any, determined at 30 June rather than the end of their income year.
10.15 This election means that no late balancing company will be disadvantaged in respect to FDT by the alignment of franking periods and the income year under the new simplified imputation system.
Removal of rebate under sections 46 and 46A
10.16 The inter-corporate dividend rebate under sections 46 and 46A will be removed for franked dividends paid after 30 June 2002. Companies that receive such dividends will be entitled to an imputation tax offset under Division 207 of the ITAA 1997.
10.17 The inter-corporate dividend rebate under sections 46 and 46A will be removed for unfranked dividends paid within wholly-owned company groups after 30 June 2003 in most cases. In certain circumstances the rebate will be available for dividends paid after 30 June 2003 for company groups with SAPs.
Exemptions from the benchmark rule
10.18 The exemptions from the benchmark rule for public listed companies will be broadened and simplified. The benchmark rule requires that all distributions made in a franking period (generally a six month period for public companies) be franked to the same extent.
10.19 The provisions in former Part IIIAA of the ITAA 1936 relating to distributions on non-share equity interests will be replicated for the purpose of the new simplified imputation system. These rules make certain distributions on non-share equity interests unfrankable.
Detailed explanation of new law
Franking periods where the income year straddles 1 July 2002
10.20 The general franking period rules are set out in section 203-40 of the ITAA 1997. Because the income year of an early balancing company or a late balancing company straddles 1 July 2002, such companies would, in the absence of further amendments, have a franking period that straddles 1 July 2002. To ensure that the rules in the simplified imputation system, which applies from 1 July 2002, operate as intended, transitional rules are required to ensure that a franking period cannot start earlier than 1 July 2002.
10.21 The IT(TP) Act 1997 will be amended so that the franking periods of an early or late balancing company will be determined first by applying the rules in section 203-40, and the franking period that straddles 1 July 2002 will be taken to start on 1 July 2002. [Schedule 18, item 1, section 203-1 of the IT(TP) Act 1997]
Example 10.1:
The 2001-2002 income year of a late balancing company that is a public company runs from 1 October 2001 to 30 September 2002. Applying subsection 203-40(2), the company would have two franking periods of 6 months starting on 1 October 2001 and 1 April 2002. Under section 203-1, the second franking period will run from 1 July 2002 to 30 September 2002.
It should be noted that the new simplified imputation system, which does not apply to events that occur before 1 July 2002, will not apply in relation to earlier franking periods.
Conversion of franking account for early balancing companies
10.22 Rules for the conversion of franking accounts from a taxed income basis to a tax paid basis for normal and late balancing companies are set out in Division 205 of the IT(TP) Act 1997.
10.23 Under new section 205-15, the franking account balance of early balancing companies will also be converted to a tax paid basis at the end of 30 June 2002. This conversion will not result in a liability to FDT if the franking account was in deficit at that time. [Schedule 18, item 6, section 205-15 of the IT(TP) Act 1997]
10.24 Consequential amendments will be made to Division 205. [Schedule 18, items 2 to 5]
FDT for late balancing companies
10.25 Under the new simplified imputation system, a liability to FDT is determined at the end of a companys income year. For late balancing companies, however, this rule could result in an imposition of FDT liability that would not have arisen under the former imputation rules. (A late balancing companys FDT liability under the former rules was determined on 30 June.) For example, a late balancing company which balances at 30 September could have an FDT liability on 30 September 2002 under the new rules, whereas under the old rules any FDT liability would not have arisen until 30 June 2003.
10.26 To avoid this outcome, IT(TP) Act 1997 will be amended so that an FDT liability will not be imposed on a late balancing company that has a franking account deficit at the end of its 2001-2002 income year. Any deficit will be carried forward at the start of the companys 2002-2003 income year. This will give late balancing companies time to adjust to the new system. [Schedule 18, item 6, section 205-35 of the IT(TP) Act 1997]
10.27 It is possible, notwithstanding the deferral of any FDT liability arising at the end of the 2001-2002 income year, that some late balancing companies might still be disadvantaged by the imposition of FDT at the end of the income year. Such companies will be able to elect to have their FDT liability, if any, determined at 30 June rather than the end of their income year. This rule applies on an ongoing basis. [Schedule 18, item 6, sections 205-20, 205-25 and 205-30 of the IT(TP) Act 1997]
10.28 Companies that wish to have their FDT liability determined at 30 June for an income year will be required to make an election in writing before or on 30 June of that year. Only late balancing companies in existence on 1 July 2002 will be eligible to make an election.
10.29 An election will need to be made each year that a company wishes its FDT liability determined on 30 June. If a company does not make an election for an income year, so that its FDT liability during that year is determined on the last day of the income year rather than on 30 June, the companys FDT liability for later years will be determined under the general rule. The company would not subsequently be able to elect to have its FDT liability determined on 30 June in a later year.
10.30 Rules for determining the FDT liability of a company that makes the election are set out in new sections 205-25 and 205-30. [Schedule 18, item 7, sections 205-20, 205-25 and 205-30 of the IT(TP) Act 1997]
10.31 The New Business Tax System (Franking Deficit Tax) Amendment Bill 2002 will make consequential amendments to the New Business Tax System (Franking Deficit Tax) Act 2002 to reflect the amendments to the IT(TP) Act 1997.
Rebate under sections 46 and 46A
10.32 A company that receives a franked dividend on or after 1 July 2002, whether directly or indirectly, is entitled to an imputation tax offset under Division 207 of the ITAA 1997. Section 46AA in the ITAA 1936 turns off the existing inter-corporate dividend rebate under sections 46 and 46A for franked dividends paid on or after 1 July 2002. [Schedule 16, item 1, section 46AA of the ITAA 1936]
Unfranked dividends paid within company groups
10.33 Sections 46 and 46A generally do not provide a rebate for unfranked dividends. However, a rebate is available for unfranked dividends paid within company groups because of the combined operation of subsections 46F(2) and (3).
10.34 As part of the introduction of the consolidation regime, the various grouping provisions of the ITAA 1936, including the inter-corporate dividend rebate under sections 46 and 46A for unfranked dividends paid within company groups, are to be removed. Although groups may consolidate from 1 July 2002, the removal of the grouping rules has been delayed for 12 months to ensure that small and medium sized businesses are not disadvantaged while they are preparing to make the election to enter consolidation.
10.35 Section 46AB turns off the rebate for unfranked dividends paid on or after 1 July 2003, subject to a transitional rule set out in section 46AC. This transitional rule is discussed below. The rebate will not apply to dividends paid on or after the date of consolidation, if the date of consolidation occurs before 1 July 2003. [Schedule 16, item 1, section 46AB and subsection 46AC(2) of the ITAA 1936]
10.36 A transitional rule is set out in section 46AC to provide a concession for groups with SAPs. The rebate will continue to apply to dividends paid after 30 June 2003 if the date of consolidation is the first day of the first income year starting after 30 June 2003 and before 1 July 2004. This is consistent with the treatment of other grouping provisions that are also being removed. [Schedule 16, item 1, section 46AC of the ITAA 1936]
10.37 Section 46AD is a technical provision to support the operation of sections 46AB and 46AC. Section 46AE is a technical provision to support the operation of subsections 46(2B) and 46(5B) after 30 June 2002. [Schedule 16, item 1, sections 46AD and 46AE of the ITAA 1936]
10.38 Section 46F, which will apply to dividends paid on or after 30 June 2002, will be amended to reflect the new imputation provisions in the ITAA 1997. [Schedule 16, items 2 and 3, section 46F of the ITAA 1936]
Exceptions to the benchmark rule
10.39 The benchmark rule requires that all distributions made in a franking period be franked to the same extent, to prevent the streaming of franking credits. Certain companies are exempt from the benchmark rule where streaming is not possible or unlikely.
10.40 The exemptions from the benchmark rule, set out in section 203-20, will be simplified and widened. [Schedule 17, item 2, section 203-20 of the ITAA 1997]
10.41 The exemptions have been widened as follows:
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- a 100% owned subsidiary of a company that is exempt from the benchmark rule will itself be exempt from the benchmark rule;
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- membership interests that do not carry a right to receive distributions will be ignored in determining whether a company is exempt from the benchmark rule; and
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- a listed public company with more than one class of membership interest will be exempt from the benchmark rule if the distribution and franking rights are the same for each class of membership interest.
10.42 The benchmark rule has also been simplified by:
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- stating a general rule for determining when the benchmark rule does not apply; and
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- providing specific examples where the benchmark rule does not apply.
10.43 These changes to section 203-20, which are concessional to taxpayers, will apply from 1 July 2002, that is, the commencement of the new simplified imputation system. [Schedule 17, subitem 6(1)]
10.44 New sections 215-10 and 215-15 will replicate provisions dealing with distributions on non-share equity interests in former Part IIIAA of the ITAA 1936, which was repealed from 1 July 2002 with the introduction of the new simplified imputation system. [Schedule 17, item 4, sections 215-10 and 215-15 of the ITAA 1997]
10.45 Section 215-10 makes certain distributions on non-share equity interests unfrankable. The relevant interests are hybrid instruments issued by Australian authorised deposit-taking institutions for the purposes of the Banking Act 1959 . The purpose of this treatment is to align the taxation treatment of foreign branches of Australian ADIs with that of foreign subsidiaries of Australian ADIs and foreign independent entities. Section 215-10 replicates former section 160APAAAA.
10.46 Section 215-15 makes distributions paid on non-share equity interests debited to non-profit sources (e.g. share capital or asset revaluation reserves) unfrankable. A company cannot frank non-share dividends unless it has available frankable profits. The purpose of this treatment is to ensure that non-share dividends are treated in the same way as dividends paid on shares debited to non-profit sources, so that these distributions cannot be used to stream franking credits. Section 215-10 replicates former section 160APAAAB.
10.47 The rules for working out available frankable profits are set out in new sections 215-20 and 215-25. These rules were previously set out in section 160APAAAB. [Schedule 17, item 4, sections 215-20 and 215-25 of the ITAA 1997]
10.48 Items 1, 3 and 5 make minor consequential amendments relating to new sections 215-10 and 215-15. [Schedule 17, items 1, 3 and 5]
10.49 Sections 215-20 and 215-25 will apply from 1 July 2002, that is, the commencement of the new simplified imputation system. [Schedule 17, subitem 6(2)]
Application and transitional provisions
10.50 These amendments will generally apply to dividends paid on or after 1 July 2002.
10.51 However, the removal of the rebate under sections 46 and 46A for unfranked dividends paid within company groups will apply to dividends paid on or after 1 July 2003 in most cases. If the date of consolidation occurs before 1 July 2003, the rebate will not apply to dividends paid on or after the date of consolidation. For groups with SAPs, the rebate will be removed for dividends paid after the date of consolidation if the date of consolidation is after 30 June 2003 and before 1 July 2004.